Increased price spread between WTI oil hubs

According to the US Energy Information Administration (EIA), increasing production of crude oil in the Permian Basin in western Texas, and parts of New Mexico, has outpaced pipeline infrastructure to move the crude to refineries, causing prices for crude in the Permian Basin (at Midland, Texas) to fall below similar crudes prices at Cushing, Oklahoma.

While the price difference between Midland and Cushing has been increasing for almost a year, recent refinery outages in the region caused it to widen substantially. Several infrastructure projects that will allow more crude to flow from the Permian to the US Gulf Coast are expected to come online soon, which should cause this price difference to narrow.

The latest EIA Drilling Productivity Report (DPR) estimates that August Permian Basin production will be almost 1.7 million bpd, 0.3 million bpd more than a year ago. With increased production, any loss of refinery demand can increase downward pressure on crude oil prices in Midland. A series of recent outages at refineries located in or near the Permian, and along the US Gulf Coast cause the West Texas Intermediate (WTI) price at Midland to fall US$ 17.50/bbl below the price at Cushing, a record difference. The previous record was set in late 2012 at a time when production also exceeded pipeline takeaway capacity. In 2013, the price gap closed when Magellan Midstream Partners reversed and repurposed part of its Longhorn Pipeline to move crude from the Permian to Houston. Previously, this pipeline had moved refined petroleum products from Houston, Texas to El Paso, Texas.

In addition to the 225 000 bpd Longhorn Pipeline, the first expansion on the Sunoco Logistics Partners Permian Express pipelines and other portions of Sunoco’s pipeline system also came online in 2013. However, the increase in crude oil production has now outgrown these expansions, and additional pipeline expansions are under construction. Magellan’s 300 000 bpd BridgeTex Pipeline, which will move crude from West Texas to refining centers in Houston, Texas City, and Galveston, is expected to begin operating soon. Beginning in early 2015, the Cactus Pipeline, with an expected capacity of 200 000 bpd, will move Permian crude south to connect with an expanded Eagle Ford Pipeline that will deliver crude to Corpus Christi, Texas.